Moody's: Productivity growth slowdown remains a sizeable risk to global growth

The persistent decline in labor productivity growth, one of the key drivers of overall economic performance, corporate profitability and the government tax base, remains among the most significant risks to the outlook for global growth, says Moody's Investors Service in a new report.

Moody's expects global growth to accelerate to 3.1% this year and 3.5% in 2018 from 2.7% in 2016, as most advanced economies register stable growth and some emerging market economies regain momentum after several years of deceleration.

"Despite the cyclical uptick, we expect global growth to remain significantly below pre-crisis levels in the near term, driven by slower growth in both employment and labor productivity," says Elena Duggar, an Associate Managing Director at Moody's.

 

"While we expect productivity growth to rebound somewhat this year and next, there will be a notable impact on growth if it fails to improve, " adds Duggar.

For example, should productivity growth remain at its 2016 pace of 1.2% or even at its average pace of 1.7% over 2011-2015, global growth in 2018 could be as low as 2.5% or 3% respectively, compared to Moody's current expectation of 3.5%.

Productivity growth has been slowing for a number of years, and in particular following the financial crisis. This trend is being driven by a combination of factors, including weak investment in the aftermath of the crisis due to the constrained availability of credit. A high degree of business pessimism and elevated economic and policy uncertainty has also contributed to the decline, partly by tilting investment away from higher-risk higher-return projects, which are the drivers of rising productivity growth.

Long-term trends such as population aging and the slowing growth in human capital and education are also behind the decline in productivity growth, as well as slower technology diffusion, lower dynamism of the economy, reduced technological spillovers due to the falling pace of globalization, and exhausted gains from sectoral reallocation in many countries globally.

The report examines the extent of the productivity growth slowdown across 123 countries globally, its drivers, its meaning for the economy, and why Moody's believes it remains a sizeable downside risk to global economic growth and, consequently, credit conditions.

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